Ticking time bomb' of state employee pensions spur funding conundrum

Although discussions about the state pension crisis can get pretty complicated, the problem it faces is pretty simple.

The system is paying out more money than it is taking in.

And the solution, although fraught with political land mines on all sides, is equally simple.

The system either needs to take in more money or pay out less.

If we limit how much money is paid out, it means less money in retirement for those who have paid into the system for years.

And if we increase the amount of money going in, there aren’t many scenarios in which anyone but taxpayers is left footing the bill.

Pennsylvania’s pension system at issue is really two systems.

First, there is the smaller State Employee Retirement System, or SERS, which is comprised of state employees and has 232,000 members.

The larger and more frequently discussed system is the Public School Employee Retirement System, or PSERS, which covers teachers, administrators, classroom assistants, clerical staff and maintenance staff in Pennsylvania’s 500 school districts.

PSERS had, as of last June, 605,282 members.

Both operate with employees contributing between 6.25 and 7.5 percent of their pay into an account, and the employers currently contributing between 8 and 16 percent of their payroll into the fund.

In the case of PSERS, the state pays roughly half the employer share and school districts the other half.

The remainder is provided through investment returns.

The returns on those investments — as much as 69 percent of the fund’s total in the case of PSERS — is supposed to supply the rest of the revenue and generate enough to pay for the defined benefits the employees have been promised.

But the Wall Street is a volatile place.

When the market was bullish, the state scaled back on its contributions in the misplaced belief that increased investment income would cover its share.

When the market experienced its inevitable correction, and investment revenues dropped, large gaps between the fund’s payment obligations and income developed.

The fact that the financial crisis hit in 2011 just after the General Assembly passed Act 120 capping its contributions to both funds only exacerbated the pension problem.

And although most school district business managers are howling at the 21.4 percent of payroll they are expecting to pay in 2014, without Act 120, the rate school districts contribute would be even higher, nearly 34 percent of payroll, the single largest item in their budgets.

And so the pension gaps keep getting wider, so much so that many of the nation’s rating agencies are threatening to downgrade the Commonwealth’s credit rating if it does not start making payments to begin closing the gaps.

Currently, the PSERS gap between income and payments is a whopping $32.6 billion.

PSERS is only 63.8 percent funded and for every $1 employers pay in, $3 in benefits are being paid out.

For SERS, the gap is comparatively smaller — $17.9 billion — but like its larger counterpart, it is only 59.1 percent funded and for every $1 employers put in, $3.30 in benefits are being paid out.

The question now is, of course, what to do about it.

Left with the unappealing choice between angering the powerful constituencies of teacher and state employee unions on one side or taxpayers/voters on the other, the General Assembly has chosen to not choose.

In 2013, Gov. Tom Corbett made an attempt to address the issue, putting together a comprehensive review of the pensions and proposing a kind of hybrid that transferred some of the pension plans and some of the risk into a 401(K)-style plan that defined the contribution and not the benefit.

Retirees under this type of arrangement get whatever benefit the fund earns from investments, bearing risk if the fund fails.

But despite the fact that both Houses with the Republican majority in the General Assembly are dealing with a Republican governor, nothing has come of the effort.

Now, facing re-election, Corbett’s proposed 2014-15 budget leaves pension questions up to the General Assembly, except that he has proposed even further restrictions, which he calls “collars,” on how much the state and school districts will contribute.

These limits are driving the rating agencies to threaten to lower Pennsylvania’s credit rating which makes it more expensive for the state to borrow money.

In 2012, Moody’s Investor Services lowered Pennsylvania’s rating to two levels below the top Triple A rating, and last year, Fitch Ratings also downgraded Pennsylvania’s debt.

And in April, Standard and Poor’s threatened to downgrade the Commonwealth’s credit rating down from its current AA (very strong) rating.

In each case, the primary reason given for the downgrade has been the state’s failure to resolve its pension puzzle.

Should that puzzle remain unsolved for another year, expect it to consume a bigger and bigger chunk out of your local school district budget and, as a result, less money available for use in the classroom and, in many cases, higher property taxes.